Don’t Forget The 50-30-20-Rule If You’re On A Budget

Smart Dad [internal link] says don't forget the 50/30/20 rules if You’re on a Budget.

Budgeting is a cornerstone habit for building wealth. One approach to creating a budget is the 50/30/20 rule.

In this article, we cover the 50/30/20 rule of managing your money and how to apply it to your finances.

But wait!

What are the 50/30/20 rules all about?


Senator Elizabeth Warren popularized the so-called '50/20/30 budget rule' (sometimes labeled '50-30-20′) in her book, All Your Worth: The Ultimate Lifetime Money Plan. The basic rule is to divide up after-tax income and allocate it to spending 50% on needs; 30% on wants, and socking away 20% to savings.

If the strategy sounds relatively simple, that’s because it is. One of the biggest advantages of the 50/30/20 rule is how straightforward it is to understand and implement.

Don't tell me what you value, show me your budget, and I'll tell you what you value.”
– By Joe Biden

Too many people budgets are terrifying – If you’re anything like me, when someone says the word budget, I instantly want to wrap all my favorite splurge items in a big mental bear hug.

“Don’t worry, beer money. I won’t let them get you! HBO, just don’t look at them. Maybe they’ll go away.”

A budget that makes you account for every single dollar can be suffocating. But the problem with this mode of thinking is that it focuses on the negative.

As a self-proclaimed optimist, I know I need to reprogram my brain to see the positives. But how do I do that when someone wants to eliminate all of my fun money?

How The 50/30/20 rules Works

50%: Needs

Needs include your rent or mortgage payments, gas and electricity, refuse collection, transport, medicines and health insurance. It also includes minimum debt repayment but it doesn't include things subscriptions to online entertainment, spending on takeaway coffees and juices or eating out. Needs are the basics of life.

Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment, and utilities. These are your “must-haves” including items that you are contractually obligated to like debt payments or bills. The “needs” category does not include items that are extras, such as HBO, Netflix, Starbucks and dining out.

Half of your after-tax income should be all that you need to cover your needs and obligations. If you are spending more than that on your needs, you will have to either cut down on wants or try to downsize your lifestyle, perhaps to a smaller home or more modest car. Maybe carpooling or taking public transportation to work is a solution, or cooking home more often.

The Essential category:

This category is for the essential bills. Let me emphasize that word: essential.

  • Rent or mortgage: You know, that place where you live.
  • Utilities: So you can cook your ramen noodles.
  • Groceries: Because those ramen noodles don’t come free!
  • Car insurance and/or car payments: You do need a car… or do you?
  • Phone and internet: Let’s face it, they’re essentials — they help you read The Penny Hoarder!
  • Gas for your work commute: Because the boss thinks you’re too sweaty if you run to work every day.
  • Credit card and loan minimum payments: Make no mistake — making the minimum payments on your debts is essential. You can’t afford to deal with the late fees and credit risks of not meeting that basic requirement. Period.
  • Other: Bills that are essential and probably no fun at all. Maybe you have prescription meds, daycare costs or even doggie daycare. Yes, Mr. Barky counts. But your wine-of-the-month club does not.

30%: Wants

Wants include the good stuff. All the things you spend money on that are not essential. Eating out, entertainment, hobbies, fashion items as well as bigger ticket items like holidays, concert tickets and the latest smartphone or tablet. You can do without these things but life wouldn't be quite as enjoyable if you did. It's perhaps no surprise that this is the category that we all tend to overspend in.

Wants are all the things you spend money on that are not absolutely essential. This includes dinner and movies out, that new handbag, tickets to sporting events, vacations, the latest electronic gadget, and the ultra-high-speed Internet. Anything in the ‘wants' bucket is optional if you boil it down. You can work out at home instead of going to the gym; cook instead of eating out; watch sports on TV instead of getting tickets to the game.

This category also includes those upgrade decisions you make, such as choosing a costlier steak instead of a less expensive hamburger, buying a Mercedes instead of a more economical Honda or choosing between watching television using an antenna for free and spending money to watch cable TV. Basically, wants are all those little extras you spend money on that make life more enjoyable and entertaining.

Personal Spending Category:

This is the category that makes this budget work for the budget-averse. It’s all of the stuff you like to spend money on but don’t really need it. You know, goofin’ off money. Did you notice the percentage? It’s a decent amount.

  • Dining out: Because eating at a restaurant means no dishes!
  • Vacations: You could make a case for vacations being a necessity, but for this budget, they’re not. Save up for it, so you can enjoy whatever you’ve saved without the guilt — or the credit card payments.
  • Going out for movies or drinks: Seriously, socializing is important. Very important. Your morning latte? Go for it. Budget for it responsibly, and it’s all good.
  • Netflix and other in-home entertainment options: Yeah, I felt you cringe here. You finally cut the cord with cable, so this is essential, right? Nope. There are ways to watch plenty of TV shows for free. That said if you can fit it into this part of your budget, go for it.
  • Shopping for clothes, decor, etc.: I know. That sale won’t last forever! You can get the latest styles, but you have to budget for them.

20%: Savings

Finally, try to allocate 20% of your net income to savings and investments. This includes adding money to an emergency fund in a bank savings account, making IRA contributions to a mutual fund account and investing in the stock market. You should have at least 3 months of emergency savings on hand in case you lose your job or an unforeseen event happens. After that, focus on retirement and meeting other financial goals down the road.

Savings include repaying debts beyond just minimum repayments, saving money for emergencies and saving for your retirement. These are the sensible things that we all should be setting aside money for. Unfortunately, we tend not to save 20% of our take-home income or to save at all. Remember, if your employer automatically deducts pension contributions from your salary, add these contributions back into your savings amount.

Savings can also include debt repayment. While minimum payments are part of the “needs” category, any extra payments reduce the principal and future interest owed, so they are savings.

Financial Goal Category:

This category puts the focus on helping you improve your financial health because it turns out that being less poor is more fun than being poor. #lifegoals

  • Investments: This includes your 401(k) and all other investments. Don’t have any yet? It’s never too late to start investing.
  • Savings: One of the biggest steps to financial health is having emergency savings so you don’t step backward every time an unexpected expense pops up.
  • Debt-reduction payments: This is for payments on your credit cards, student loans and any other debts that are above the minimum payment. As long as you owe money, it’s hard to get ahead. And yes, that $400 you borrowed from your roommate for that weekend in Vegas fits here. (Even though it’s interest-free, you may want to pay your friend back first.)

Follow the 50/30/20 rule

The first thing you must do is calculate how much money you can allocate to your needs, wants, and savings or debt. Let’s say you’ve calculated your after-tax income as $6,000 per month. In this case, you’d have $3,000 for needs, $1,800 for wants, and $1,200 for savings and debt.

Now that you know how much you can spend in each category using the 50/30/20 rule budget, the question is which expenses go in each category. You’ll have to use a bit of discretion in determining what fits into each category, but here are some general guidelines to follow.

Needs are expenses that you absolutely must keep in your budget no matter what. These include things like housing, utilities, transportation, and health care expenses; at least the minimum payments on your debts; and the bare minimum of basic clothing and supplies for living.

Wants are expenses that you choose to spend your money on but that you don’t need to live your life. This category includes expenses like dining out, alcohol, cable TV, internet, shopping trips, vacations, memberships, subscriptions, gifts, entertainment, and other luxuries.

It’s easy to confuse many wants as needs. A simple way to determine if something is a need or a want is to ask if you could live without it. If you could, it’s a want, not a need.

Finally, the savings or debt category is money you set aside for your future or to pay off debt faster than required. You can use this money to build an emergency fund, save for a down payment on a home, invest for retirement or pay off your student loan debt or credit card more quickly than required.

If you want to save money more quickly, you’ll need to set aside some of your wants money for extra savings.

So if your after-tax income is €2,400 a month, according to the 50/30/20 rule, you should try to limit your needs to €1,200, you can spend €720 on your wants and you have €480 left over for saving or repaying debts.

Getting your spending in line with the 50/30/20 rule

It's not unusual to discover that your spending doesn't match the 50/30/20 rule perfectly. It might take a little while to bring it into line.

If your needs exceed 50%, you might have to do without a few wants for a bit and use some of that money for your needs until you can get your needs down to a more manageable level.

If your spending on your wants is way north of 30% then you need to take a good look at where your money is going and reign in your spending.

If your savings are much lower than 20% because of debt repayments then you might want to look at strategies for reducing your debts.

Why the 50/30/20 Budget Works

This method works well for those new to budgeting or puts off by rigid spreadsheets.

Splitting your expenses into these three broad categories will get you thinking about the value of your purchases while providing flexibility as you find your frugal footing.

And by building pleasurable spending into your financial plan, you’ll be able to enjoy what’s most important to you while you find places to cut spending.

When the 50/30/20 Budget Doesn’t Work

For some, the numbers simply won’t add up.

Maybe you have two jobs and still can’t earn double the price of rent in your area. Maybe your daycare options are limited. Or maybe your student loan debt is taking up most of your income.

For others, there may not be enough structure in this method. (Looking at you, color coordinators.)

That’s OK.

There are plenty of budgeting methods to choose from. Sometimes, you can modify these methods to fit your needs; other times, they just don’t work.

What’s most important is that you zero in on eliminating debt and growing your personal wealth.

Is it fun? No. But when you find a budgeting method that works for you, it’s not torture, either.

Just remember: Personal finance is about prioritizing and then weeding out expenditures you can live without. It’s not about living like a hermit or denying yourself any fun.

Tips for Budgeting Success With the 50/30/20 Rule

Let’s start with the biggest chunk. That 50% number you should put toward necessities is a maximum. Yes, that’s right. A maximum.

If your monthly bills are higher than 50% of your monthly income, you need to make some adjustments. Ideally, your housing shouldn’t cost more than 30% of your take-home pay. If it does, you may need to consider downsizing. It’s not fun, but it could be a key step to getting ahead financially.

Next, take a good look at your personal spending. Again, that 30% is a hard line. If you go over your past year’s bank statements, you’ll probably find that your spending is a bit high in this category. I know I’ve been guilty.

If you worry about building your savings category to 20% of your income, try these tips:

How often do you eat out at restaurants? Are you shopping smart for groceries? Be honest with yourself, and think about lunch during the workday, too. Can you trim that expense? Maybe you’ve got space outside and can start a garden.

Take a hard look at your TV, phone and internet bills. Do you need all of those premium services? Cut back a little and see how you do. When’s the last time you read a book? Check out your local public library for a ton of free books, movies and more.

Shopping: We all love it, even if we claim we don’t. It may be clothed. Or it might be booked. Whatever your weakness is, set a budget for yourself. Have old stuff you don’t want anymore? Sell it and add that money to this part of the budget!

Finally, realize that the financial goals category is where this simple budgeting system helps you the most. That 20% is not a hard cap. If you can find a way to save more, pay off more on your debts or boost your investments, do it.

Is the 50/30/20 rule budget good for you?


Overall, the 50/30/20 rule can be a sound budgeting method for some people. But whether the system is right for you depends on your specific circumstances.

Having just three categories to track might help you focus on fine-tuning your finances instead of getting bogged down in the process of categorizing each individual expense. For others, the lack of structure could make it harder to find ways to improve their spending habits. Ultimately, you need to decide whether a budgeting system that’s less detailed or more highly detailed will be best for you.

Another potential issue with the 50/30/20 rule budget is the breakdown of money allocated to needs, wants, and savings or debt. Depending on your income and where you live, 50% may not be a large enough percentage to cover your needs.

For instance, people who live in areas with a high cost of living may have to put a large part of their income toward housing, making it almost impossible for them to keep their needs under 50% of after-tax pay.

Finally, some critics of the plan say the 50/30/20 rule budget doesn’t work well for higher-income earners, because it calls for too much spending on wants versus needs or savings and debt.

Bottom line

For people who don’t like detailed budgeting, the 50/30/20 rule budget is a simple approach to keeping their finances in check. With only three major categories to track, you don’t have to dig into the nitty-gritty as much as you would with a normal budget.

Unfortunately, the 50/30/20 rule won’t work for everyone because of individual circumstances, such as residing in an area where the cost of living is high. Keep in mind, though, that you can adjust the rule for your particular needs by changing the percentages to match your personal situation and financial goals. If that doesn’t work, there are plenty of other budgets you can try, too.

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